You might have to pay inheritance tax (IHT) on the value of your estate. This is the sum of all taxable assets you own at death, such as most property, your possessions, funds in bank accounts etc.
HMRC levies inheritance tax at 40% on all assets you own above your nil-rate band threshold. This threshold stands at £325,000. If you as a single individual hold assets worth more than £325,000, you might face an inheritance tax bill of 40% of everything above this level.
If your estate is larger than £325,000, there are two main ways to potentially increase the above threshold and avoid inheritance tax on a higher amount of assets:
If you own a home and pass it as your main residence to direct descendants (children / stepchildren, grandchildren etc.), you can use the main residence nil-rate band. It’s an extra allowance that stands at £175,000 in the 2024/25 tax year. Thereafter, it rises with inflation.
It applies to all estates worth less than £2 million. For estates worth more than this, it tapers down by £1 for each £2 over £2 million.
The transferrable nil-rate band lets married couples / civil partners can pass their £325,000 nil-rate band to each other. On the death of the first partner, if the deceased leaves everything to the surviving partner, it potentially doubles the survivor’s £325,000 nil-rate band to £650,000.
This means the surviving partner can leave assets of £650,000 on their death without any inheritance tax.
For a single individual, the combined 2020/21 main residence nil-rate band of £175,000 and the nil-rate band of £325,000 lets you leave up to £500,000 to direct descendants without your estate paying any inheritance tax.
In a marriage / civil partnership, each partner has their own nil-rate band and main residence nil-rate band. You can also transfer the main-residence nil-rate band between partners, therefore leaving up to a combined total of potentially £1 million to direct descendants without paying any inheritance tax.
To work out your potential inheritance tax liability from the start of the 2024/25 tax year, you’ll need to:
If this sounds complicated, don’t worry — it can be! That’s why we’ve built our quick and easy Inheritance Tax Calculator. Simply enter your assets and liabilities and a few more simple questions to calculate your potential inheritance tax bill.
To summarise…
If you’re struggling to figure out much inheritance tax you’ll pay, you’re not alone. It’s not a simple calculation, as you see above!
While our Inheritance Tax Calculator is a good place to start, it’s no substitute for an expert’s advice. With our expert knowledge of inheritance tax, we can make recommendations as to the best way to minimise the inheritance tax bill for your loved ones.
We started Drewberry because we were tired of being treated like a number. We want to give you as our client the service you deserve when discussing matters as important as planning your financial future.
Below are just a few reasons why it makes sense to let us help: